Q3 2020 180 Degree Capital Corp Earnings Call
This is Daniel Wolfe President of portfolio manager of 100, <unk> capital having.
Kevin Rendino are chief Executive Officer.
<unk> I would like to welcome you to this call.
Good morning.
All participants are currently in listen only mode.
Our prepared remarks, we will open the line of question.
The asking the question <unk> type of Star six on your phone or quick do you ask a question on the year for.
For just standing by the computer line.
I would like to remind participants of this call is being recorded and it will be referring to the slide deck. The we of course on our Investor Relations website at <unk> <unk> degree capital.
Capital Dot com.
On the financial results.
Turning to slide to the contains our safe Harbor statement.
This presentation may contain statements of the forward looking nature relating to future guidance same its continues for <unk> are for the.
Our intended to be made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of mentioned that you thought the.
These forward looking statements are subject to the inherent uncertainties on predicting future results. The conditions. These statements reflect the company's current beliefs on a number of important factors could cause actual results.
The different looks you Mitch.
Serially from those expressed herein. Please see the Companys filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with the company's business it could affect our actual results, except as otherwise required by federal securities laws on the capital Corp. undertakes no obligation to update or revise these.
Forward looking statements sort of like new them for uncertainties I would now like to turn the call over to Kevin.
Good morning day, you can hear me right.
Yes, okay. Okay, great. Thanks for in separate places today, good morning, everyone I hope everyone is safe.
And healthy and here's hoping we're on the final leg of the.
What has been an incredibly depressing pandemic.
Difficult 2020, turning to slide two a summary of our third quarter, one on which to or any of the climbed 7.4% on the backs of a 25% gain from our public stock picking this was offset by a 10% decline for write downs in the private portfolio the.
Public market performance was led by Maven, Potbelly Lantronix and quantum.
The only one negative in the quarter and that wouldn't be so on them.
Private portfolio decline was led by three names essential originated loans.
We have a separately managed account that's been up and running for a few months now and on a similar run of great performance in the quarter.
The move to the next line.
On slide three you'll see on all we had a mass of snap back in or any of the over the last two quarters rising to $2.90 a quarter end. This book value is very close to our high that we established just three quarters ago.
Let's move to the next line.
Slide for really matters to me at the end of the day just as much for equity performance, but also just for the slide.
The triple the amount of cash and liquid securities. We have on our balance sheet. The higher this per share amount goes the higher the floor should go for our share price will finally, beginning to build from scale of 180. The law. The average per se. It may be easier to take our book value from $2.90 to $6, starting with $55 million of cash.
On $1.78 per share the.
Has been taking our book value from the low twos to the almost $3 level that it is today given we started this exercise was only $17 million cash or so in the 64 cents per share. So I'm quite pleased with the direction that the slide shows we have taken our cash for share on our balance sheet.
Slide five shows our discount the NPV over the course of the last four years.
I have to say the suggest I'm disappointed in the <unk> slide would be an understatement.
Literally trade at the same discount we did when we started back in 2017 and this despite the fact that back then we had 75% of our assets on price.
EBIT holdings and today that number is less than 40% plus as I said of just a couple of minutes ago, we've taken our cash and liquid securities the nearly a $1.80 per share.
I got to the board in mid 16, and literally at that time in the middle of the summer we had $5 billion in cash when I first joined the board in 2016 and today that number of stands at $55 million today, we'll get to the sum of the parts at the end of our presentation just a few minutes on.
On slide six Weve included this in our shareholder letter of letter. This is the performance of the Russell 1000 growth index over the Russell 1000 value Index. This has been the trying year attempting to navigate through the CCAR image of a global pandemic amidst the high octane over the emotional election cycle has been difficult enough.
Doing it in the face of the biggest headwind for value managers I've experienced of my 32 year career as ended the more complex set of obstacles in.
In past shareholder letters of written about out of the pandemic in the assuming global economic meltdown exacerbated an already bifurcated stock market between the winners and losers.
You will see we talk about Apple, having a market cap greater than the entire foot C 100, we.
We all know zone, but the trades at a market capitalization of 114 billion today, which is 50 times revenue.
I mentioned Tesla I don't on one, but I like looking at them and I know a lot of people swear by the he's a brilliant investor and a great entrepreneur Elon musk, but he also oversees the company whose market cap exceeds that of for G.M., BMW, Daimler and Volkswagen combined.
It's insane.
Look at two funds managed by.
One of the world's largest global asset management companies of through Q3 of the total return of the large cap growth fund was 26% while the return of the large cap value of mutual fund was down 15%. These are large cap funds of 4000 basis point difference in returns year to date.
One last illustration of the market that reside in looks the too extreme polar opposite asset styles through Q3 20, the NASDAQ hundred is up 32%.
While the Russell Microcap index is down 19%.
This is the the parity disparity that has shown on this chart.
On the next chart is one further illustration of.
Of the bifurcated market that I've talked about this is the percentile median change between the PE or the price the book between growth and value.
I've never seen such a wire disparity and value GAAP and all my careers look 2020 has been difficult.
To say the least the discrepancies in the multiples of these companies trade at versus a share the widest discrepancy that we've ever seen in generations that in my opinion are not sustainable do I understand the why this has happened I absolutely. The we are living in a pandemic and earnings for a certain group of companies.
On one way and earnings for others of gun another but do I think this is forever no I don't as I said in the last six months. This pandemic has an expiration date and the data is one of the vaccine is developed and widely available. It is our view that's not an if but the when when the economy recovery takes hold we believe the market will expand its appetite for.
More than just a handful of names and hopefully 180 will actually have the wind at its back not in front of his face as it has been for the greater part of the entire year.
On slide eight.
Our normal sources of change the net assets from Q2 to Q3, we started with the book value of 270, we had 36 cents of gains from our pipe the public portfolio, we subtract 14 cents of losses for the private portfolio two cents of normal operating expenses in the end up with the $2 90. So.
The book value Slide nine is the same slide but looked at a year to date same story gains on the portfolio of public portfolio offset by losses in the private portfolio and on.
On slide 10. This is the performance over the history of 180, we've generated nearly $40 million worth of gains or a $1.30 per share from our public portfolio, while incurring 27 cents per share.
Or nearly $30 million from losses in our private portfolio over that same time period.
I'm, sorry, $9 million worth of losses from of private portfolio over the same time period subtract for years of operating expenses, including in early 2017 restructuring charge in the end up with the $2.90 book value.
As for Slide 11. This is the look at our public market performance.
I'm proud to say in the face of all we've talked about with regards to headwinds and with regards to value investing we did achieve the 25% return in the quarter.
Good 30% of this game came from a recovery in the price of Maven as the advertising business has begun to recover but let's remember this is the pink sheets stopped it has an uplift of yet and is working hard of getting out its full numbers. So the stock is going to move on.
Around the lot quarter to quarter.
Even this quarter, it's actually down a little bit. So we don't take any solace in and what mavens, certainly does quarter to quarter. We believe in the business over the next three years and that's where the real money is going to be made potbelly was up 69% in the quarter Synacor, 38% quantum 20% just the good all around quarter as the market.
Began to reward businesses and stocks returning from the earlier shutdown and stay at home orders as it relates to the specific reasons why for each company. That's what slide 12 depicts.
I'd offer there was a very well receive CEO change it may even one of the reasons why the stock did so well last quarter on potbelly of the company hired Robert right. It was the former COO of Wendy's to run the business between him and Steve Souroullas, who came from Panera and as the current CFO, we really think the company's infants.
Ask the cans from a leadership perspective, and we think we're set up to to make of a lot of money over the course of the next couple of years, especially from where the equity prices today, what is going to take time of potbelly is to work through the fact that we are still in a pandemic I know two vaccines were announced in the last two weeks.
But we're also staring at.
The spike in cases of the virus and were seeing strict stricter guidelines for activity.
That's just the facts. So we have the vaccine, but getting through the next two or three months is going to be challenging as winter unfolds here and potbelly is going to have to just get through this period come out of it on the other side and we think we'll have a home run investment.
Both quantum and Lantronix reported solid quarters.
Just from reporting their numbers on the stocks appreciated as a result, but.
Just a couple of portfolio notes to consider on slide 13, we did become a board observer of some of them in the quarter. The stock is clearly not performed as we had hoped following the great second quarter earnings report, it's incredibly ex inexpensive, but the whereas a lot of work to be done there, which is why we've become board observer.
We are restricted in the name.
As we do have board involvement so I'll be very careful about what I can answer if anybody has any questions.
About sort of my have to be careful there were.
We're also as you know of chairman of the board of of Synacor.
Slide 14 is our year to date performance.
Again, if you had told me in March that by the end of the Q3, we'd be up seven the half percent I would have taken it and that's where we are winners.
Winners for year to date include franchise group, which we sold Adesto, which was taken over.
We've mentioned Lantronix and maven already a biggest loser year to date was quantum which the super Super disappointing to us because we really believe in the business and we certainly believe in the leadership team. There. We had started to sell the position I think we had sold about a third of it earlier in the year.
You know in the $8 $8.50 range and the pandemic took hold and the stock literally went from eight to one on air and we just stop selling it and as a matter of fact, we've reversed ourselves and we started buying it back. So we certainly believe in the business. Its just the stock start at a very high level this year and the independent killed it.
Because of its high debt levels Slide 15 is our scorecard for every stock Weve on since we started in 2017.
Pretty good performance, so I'm not going to go through each one.
But one of the things to note here is our batting average has been 77% of the names that were all up versus the names that were down.
You know I've always said that if you're right to other three times in this business you are going to be successful what we've been right 77% of the times on.
Really pleased by that more importantly, our slugging percentage is even better meeting of the names that of one we won big and the of the names that of lost we've lost small so that makes for a terrific performance.
Over the period of time, the that Weve been managing money in this format on.
On slide.
16 is another way of looking at our slugging percentage, what you'll see here is the winners have large of green bars to the left and high IR ours and the losers have much smaller bars to the right and have much lower negative IR ours. So that as I said is a formula for good performance overtime.
On Slide 17 is our scorecard. If you asked me in December of 2016 would I have signed on to this page of the answer is yes, 25% this quarter versus seven yeah.
Year to date seven in the half percent.
I'm, sorry, 25, and a half percentage versus 3.7 for the Russell Microcap year to date, seven and a half versus the down eight one year of 16 versus for three year up 100% versus flat the numbers have been of.
Been terrific and we're proud of them were making significant investments in concentrated positions as you know and many times for using activism in board involvement as our part of the strategy for creating value. Our performance has been and will continue to be episodic and its uncorrelated, which is what we like the market can go.
Go up if our stocks are working on were not Conversely market can get rolled over and if we have one of our companies that were on the board of get taken over we're going to have good performance. So let's remember that the next time, we do underperform that the goal here is to provide for our shareholders with performance like you see in columns for five which are three.
For years and for years, rather than just staring at our numbers on a quarterly basis in determining if we're being effective or not.
On slide 18, a pie chart that we show you each and every quarter, but for the remaking of the company since we got here.
We were at an all time high on our balance sheet for cash and liquid securities of total of almost 61% hopefully one day that number will be 100%, but we've taken that number from 25% to 60% over the last three years and we look forward to taking it from 60 to 100 sometime in the next few years I.
Did prep everyone for this chart.
Cost of about Maven earlier, I will always be transparent as amazing as last quarter was sort of this quarter. We haven't participated in the upside is as much as we did last.
The quarter looks like we may have borrowed some performance from last quarter on the early parts of this quarter.
Saddam of struggled I talked about maven.
It's early a lot can go on between now and then we'll obviously review that but I wanted to give you a snapshot. We've we've we've sort of have flat performance for so for Q3, which is a little disappointing to say the least would that Daniel when I turn it over to you and then you will turn it back over to me on the we'll take some questions.
Sounds good thanks, Kevin.
Please turn to slide 20.
The slide with our 10 like the privately held holdings by value as of the end of the quarter for the quarter as Kevin mentioned of private portfolio decreased in value by approximately $4.3 million or 14 cents per share. The largest decreases were in essential health systems origin and Lodo. These declines were.
Due to specific events for the portfolio company, we are under confidentiality with the U.S portfolio company. So it's difficult to go into too many specifics there, but there were also no material increases in value in the private portfolio this quarter and this quarter.
The almost every shareholder letter an update call we state the while we desire to shepherd, our existing private portfolio the access to ore to explore opportunities to sell our positions and those companies. We have the luxury of being able to sell our private holdings. When we believe it makes sense for shareholders rather than being forced to do sort of survives the.
The making of our business from the significant cash and securities of public portfolio of companies that we have built means that we don't have to sell anything unless we feel that is the right thing to do for shareholders any decision to sell our product portfolio would be based on a variety of factors and not limited to just the sale price selling our private portfolio would allow it.
Focus all of our time and efforts on our part of public investment strategy would also reduce certain operating expenses that are incurred solely because of the private portfolio as Ken said earlier since the start of one of the our private portfolio has reduced any the by 27 cents per day.
Look investing strategy of increased any of the buying dollar 30.
It is important to note that future results may be materially materially different than prior results. That's.
That said, we remain interest and to provide to monetize this private portfolio.
Please turn to slide 21 as.
As we have noted in previous letters the of dramatically reduced our cost structure on the R&D strategy.
2016 before of Sun's change investment focus the management team for operating expenses, excluding stock based compensation in the interest on the any debt. The we have the time.
Averaged approximately $1.3 million per quarter.
For Q3 2020, our operating expenses equaled approximately 790000.
The remind shareholders that our Q1 2020 expenses included the reversal of the deferred portion of the 2019 bonus of approximately 317000. This deferred portion of the 2019 bonus has yet to be reinstituted as of the end of Q3 2020, and it will ultimately be the decision of the comp committee of our board of.
Directors at the end of the year on whether or not that is instituted and also any bonuses for 2020.
Please turn to slide 22, and 23, we continue to the anticipate the reductions on our operating expenses as a percentage of net assets, we based on growth in our net assets rather than further reductions in our expenses.
The positive events in Q3 2020 discussed previously they hold throughout the core of the year.
Will help reduce these expense ratios as of the next quarter and in future years, we remain committed to treat every dollar of shareholder money with the utmost care and consideration as we continue to say and we'll repeat all the time is much easier to grow any of the when the expense hurdle rate is where it is today ill turn it.
Back over to Kevin.
Thanks, Daniel the last couple of slides or just sort of some of the parts, which we show for you every quarter.
The end of the day.
The remaining portfolio.
The of value not being ascribed to our public and cash and liquid securities is about 15 cents a share if you'd give us full credit for our cash and liquid securities.
That means the market is paying $4 million for $35 million on assets. That's the way it shakes out makes no sense to me.
I've said that before we will have wins in the private portfolio. We've had we've showed you where some of the wins are companies like the Petra.
Marsano over the last couple of years sales like Hcl, we'll have them again, the $4 million by the way is less than the net present value of the cash flows that we hopefully can expect to receive from our investment.
In Petra.
That was taken over last quarter and.
Trades at nearly $4 million true.
Trades at about 30% of the value we have for one the security, which happens to be AG volume and I know, there's a lot of.
Folks around the private equity markets and the VC markets that were left on that volume. So we feel okay about the private portfolio will.
We will continue to run our strategy around creating performance from what we can control on the daily basis, which is our public portfolio and I certainly think the some of the charts show that our equity is fairly inexpensive relative to the book value that we actually have which is $2.90. So.
Well why don't we stop there Daniel on then open it up for of queuing on.
Sounds great. If you have a question. Please type star six on your phone per click the ask the question on if you are participating via the webcast.
We will hold for a minute, let the queue so with any questions of people.
Hi.
Hello.
Hi, Whitney. Please go ahead.
Hey, good morning, Dear friends.
I have a.
Sort of a broad question well actually of specific question about the way an AG Val.
We have.
In the case of both of these end markets just extremely for pricing in the case of computing and electronics and so forth, yes, while valuations.
As Kevin is were marked in.
In that space.
In the agricultural business.
Yes.
I mean.
For years ago, I was a kid hauling grain between central Kentucky.
In Illinois and Ohio.
And we've almost got prices, where we were then which was the period of a bottle of partially from bunker hot driving soybeans to almost $20 a bushel.
Regardless of all of that history.
I don't I can't recall, a time when agricultural raw agricultural markets have enjoyed such high pricing.
So my question is.
What is D wave waiting on.
To do.
Some sort of structure or possibly even going public and what is the AG. What do you think are the structural impediments for AG bow on to receive of.
Some sort of significant of that possibly going public, possibly being taken over by someone and I guess lastly, as sort of a segue on.
No those items is the.
Apparently a partner and AG Val the other times, it's been around for a long time of had an incredible track record.
What I mean that would seem to me to the logical exit strategy for AG bound the cell too.
No those items.
So you know I guess, it's sort of a.
Ill.
Well first of all the questions that probably you guys can easily addressed but in any of that.
Please please.
The share whatever like you can on those two subjects.
Daniel Let me, let me try and take this one and then.
Add on if you if you don't mind.
We asked the same questions Whitney.
If I had controlling stakes in companies.
Like these the.
Yeah, there's a forcing mechanism.
Which we don't have in the private markets, which we do have in the public markets. So we asked the same questions look I got here in 2017 D wave started in 1999.
Part of the D waves problems was it was answering questions.
From an AI perspective.
And the questions Hadnt, even been asked before so their technology seems to be way ahead of its time, but from a commercial perspective.
They were they've had a very difficult time of getting there.
Basically their technology into the hands of the people that we're going to use it because I think there are way ahead of their time.
And over the years, they've had to raise money more money and more money and more money to fund the engineers to build the technology that they've built.
And as such.
You end up getting the alluded overtime because yet every fifth every third quarter. It seems like you run out of the $50 million that you raised.
For the D wave has been as the source of bitter disappointment.
For for all of Us and you've seen that valuation get shredded in the last two years because the company was was was run by the effective management team that could not make their technology commercial so.
So thats one now I agree with you the Theres still great technology. There on there is still a place for them.
And again, Daniel you can add on to this with regards to AG volume.
I think the like being private.
The like being private until they find how difficult it is to raise money in the private markets forever. The actually built the nice business and the one thing I agree with the Whitney.
Now it should be the time, but the one thing about AG volume that's different from D wave, we've gotten paid on AG volume.
If you go back and look at our book value on AG volume.
While it's not public cash for us to.
To to go get our valuation has gone from the low I don't know two or $3 million $4 million.
The $13 million as a result that they've been able to raise capital in the private market valuation levels that were sort of it as high or higher than the previous round and.
And so that has been a successful investment over time, but if they overstay their welcome in the private markets and can't build scale in their businesses will suffer the same fate as every other private business that hangs around too long and doesn't find the right window to monetize itself. The I think those guys are super smart.
The board of Super Smart.
I Didnt.
[laughter].
Daniel knows this I did not feel that way about.
The waves board, nor the former CEO of the wave.
Nor the former CFO of the wave.
I feel differently about AG volume, but.
But we'll see like the proof is in the putting and to me. It seems like there's a great appetite in market for something that AG volume and D wave of do but it's up to them to do it.
So there's only so much we can do Whitney in terms of voicing our hope and desire.
That really is the truth again, we don't on controlling stakes in these companies and therefore can't force them to do anything which is part of the frustration in the private portfolio. Daniel is there anything else you want of that I don't know if I did energizing. The no I think you summed up perfectly the only thing I'd add is.
Everything Kevin just said is exactly why we needed to make the change in the business that was in.
Yeah, no I totally get all of that.
I actually listen the one of the D wave guys speaking on on a couple of months ago something like that.
I can't remember what his position was but the.
Impression that I walked away from was she was the skies totally wrapped up in math and he is not running the business. There you go from here.
You summed it up.
So anyhow.
I totally get it and these are legacy assets and we just got to do whatever we can do.
The keep plugging away at all of it and.
Lastly, I just want to thank you both for everything that you're doing to advance the cause that's all of GAAP.
[music].
Thanks Whitney for.
The share that when they I will I should give you the the Ceos for number.
Both cases lobbing your views there because we certainly wish we share of them.
Well absolutely.
I'd love to think that I could make a difference, but if you think I can make a difference of I'll call them I'm not afraid to talk to anybody.
Thanks by the appreciate it thanks, Thanks Whitney Thank you.
One of the line go ahead.
Good morning are you able to hear me well.
We can.
Okay side, just as computer a number now.
Okay.
Hi level. There is the investment news Youre are of 2020 seems to be specs.
Do you are you guys aware of any stacks of interest in any of the private companies I mean, not not looking for anything specific and then if so do you know.
What the hang up has been for.
For any of those that have received possible interest from from snacks.
I say had interest from specs it'd be facts. They are not so you could assume either.
Theres no interest or.
They are on working on becoming specs and if they were I I, certainly couldnt say that in the public manner, because that sort of the information that I would have that I could share many of our companies of small.
Some of these facts that are coming out of hundreds of millions of dollars. So.
That is certainly a path in an avenue that has been created in the last couple of years or what is the 130 of them out there.
It's another alternative way to become public without having to go through the rigors of of the normal IPO market.
We do our best to shed that light for the companies that we own and let them know.
That's our area of expertise of sharing Wall Street wisdom.
Daniel does a good job of sharing that wisdom with the companies that we own including the couple of that we've already talked to.
At the end of the day as I said earlier, we don't have controlling stakes and we can't force.
We can only recommend.
The paths for them. So it's certainly a path that exists the didnt exist.
That should be helpful, but until they become specs there still private companies.
And the you know these all of these guys can talk talk talk while they want it's about EUR of executing and walking the walk so.
We share that your views about how to become public with most of our companies will continue to do some so I think it's a good thought.
Great.
I appreciate your thoughts there that that's all from me. Thanks for another good quarter keep up the good work.
Thanks appreciate you taking the time.
Hi, Please the night for any branding.
Branding go yet from Delta investment group had net.
These guys of caring about $20000 the quarter on the for your broker dealer expenses.
What businesses that supporting in are you getting the decent return.
On that.
Daniel.
Yes, so we form the broker dealer as a way for us to be able to compensate.
On individuals that are within the from price, particularly Robbins who's helping with fund development.
And on raising additional capital I think we've talked about earlier the you know.
In the shareholder letter that is on a an area that we're interested in doing that's also why we registered as an r. I may be able to manage that external capital and you know what I would say as it is.
The focus of.
Our efforts and we'll continue to drive forward on that and.
The expectation currently is that you know it it'll be a good investment as we look to operating on additional capital manage.
So we have we generated a 25 million dollar win from a public companies pension fund.
That would not have been possible had we not had the performance numbers that we've had and the relationships that we are making with the outside sources of capital.
If we can't raise money above.
Above and beyond that we think it's already paid for itself. So thats number one number two if we can't raise money.
Or we feel that we have enough equity in capital on our on balance sheet, and therefore don't have an interest in raising outside capital of the was shut the broker dealer down it's a it's a how do we pay people to generate revenue for US mechanism. That's all it is.
Which is what we said from day one.
All right. Thank you.
Based on.
Excellent.
Exactly yes ahead, Hey, Hey, good morning, guys. Thanks for taking the questions and the nice job on.
Your continued work here two questions if I can.
First on us on on side on the decision to become a board Observer I guess I'm just curious on the general philosophy on.
Why you choose to do that versus sort of just in form of.
Dialoguing with with management and does becoming an observer a handicap your ability to.
The transact in the in the shares and clearly the.
The stock got the whacked pretty good here.
And I'm just curious just by being the an observer you lose that flexibility to add to the position.
We do lose the flexibility, which is why we say were value investors first.
Construct of activists second we prefer not to be on any boards of we don't have to be.
It's a it's a lot of work as you know.
You do put yourself in a position where.
You lose the flexibility to the trade in and out of names on the way you would if you haven't filed.
Are you not a board observer or a member of the board.
Well, we go on boards, one we want to win act of change.
And we want to have the saying the final outcome of the business.
And where we think we can help.
And so in the case of Saddam's very specific synacor as well. We went on was a we went on with an agenda.
The we create value for our shareholders.
In the shortest period of time and with the most maximum percentage of value creation.
Creation for shareholders.
We sometimes we are asked to go on boards and sometimes we force our way on boards, but every time that we've been on a board its been.
Collaborative and collegial.
On an agreement that the.
We see IDI with what needs to get done and we're willing to roll up our sleeves to get it done.
So.
So thats why we do it we want a final say in the in the inevitable outcome of.
Of how a business is going to be run.
That means.
You know that can mean, a lot of things that can means changing out the whole board you.
The it could be changing out the entire management team it could be selling the company.
I mean, I don't it could be a lot of things.
Well, we won final say or more say in how we want to vote, that's the bottom line and when.
When you take our big the Big Stakes that we have we are vote. Our stakes carry with it of very large vote from us from a shareholder perspective, but it enables us to get the actual of votes for that matter, which are bored votes. So.
So that's kind of why we do it we really don't want to do it every single time I prefer buying turtle Beach in watch you can go from for to 16 and 42 days on.
I prefer watching Adesto go from two to eight selling it going back to two buying and selling it at eight again, where we're not on the board.
And we have that flexibility, but when you don't believe in how businesses are running themselves from either of governance perspective or management perspective.
That's when you get involved.
More often you know potbelly.
Is we really admire the CEO of the COO I mean really admire them.
It's a it's a restaurant company in the middle of the.
Pandemic, so already mentioned the word again.
Where cases are spiking and the company is going to have a couple of issues with comps of the next two months, we know that but you know what that business is in the hands of managers. The get it management is everything to us and when we find managers that we like we let them go do their on thing and we don't need to be involved in the cases, where we are involved in.
Because we feel we need to be involved it's because something is wrong at the top line.
And something needs to be changed from the top so thats kind of I don't know it's of more philosophical than anything else. We this is not our day jobs.
I don't expect to be on the side on board three years from now on all expect to be on the Synacor Board three years from now when we joined the Street Board in November of 17, we Didnt expect to be on the Street board of three years from that moment, and we were only on for year and a half, but you know what we were able to help the the business sell itself. So.
That's kind of why you do what you do.
And if you limit your flexibility in terms of selling I don't care, because we're not doing this as I said earlier for instantaneous performance or for quarterly performance. We're doing this to have the home run investments in the names that we choose to investing.
And if Saddam goes from 80 cents to 40 cents I honestly.
Honestly I don't care, if we buy to 75 cents, we hope to make money from 75 cents. If we buy synacor to dollar 20, we hope that it goes to two bucks, it's things like that it's not about what these stocks do on a quarterly basis.
So anyway, the I'm, sorry of as long winded soapbox, but that is how we think about it from a philosophical perspective.
Yeah.
Understand I mean, it's it's there's art art versus the site on that.
Yes, I was just you know so I think it was last quarter you talked about.
You know management being some someone you knew and.
I just I was kind of surprised to see you guys join as an observer rather than sort of keep preserve that value to buy to make more money.
In this name.
Some.
Let's let's hang on just on that alone.
They had an unbelievable second quarter you saw the third quarter. They reported it was really disappointing.
So you know that was a little unsettling to us and then.
You are right I do have a high level of respect for the CEO of.
I was a reference for him when he was hired last fall so.
That's why I feel like it's time for us to help him roll up our sleeves and try to figure it out together.
Rather than just sort of a.
Sort of abandoned him, it's a for 14% of the company so and by the way.
That was the board the needed to be fixed that wasn't the does not necessarily CEO of the needs to be changed out that board and the folks that left needed to leave you saw with the stock has gone from 13 to two of dollar for a reason you know before we got here and so we believed in our heart of Hearts that going on to the board.
Becoming bored observers would help the forcing mechanism of changing out board members that of overseeing the collapse in the equity price not since we've owned it we haven't on it until last last quarter, so well and they've they've already started to make changes. So we're happy about that sorry go ahead.
No no no color I think that's that's what makes the what you guys are doing quite interest in.
And your your willingness to to invest the time and my second question on as you made a comment in the.
In the letter this quarter.
And you've mentioned the discount on multiple occasions, but I'm curious when you guys look at the the universe of of smaller closed end funds and other kind of holding company structure is what what level of discount.
Do you think is appropriate and the reason I ask is I, just wonder where.
At what point does your interest cash so sort of peak, that's that youd be buying your own stock instead of taking cash and invest directly in the in the portfolio of companies.
So.
The first thing is.
We.
If we thought the environment for investing.
Hey, we're going to have a return profile less than us buying back our stock. We've done this exercise I can show you the exercise of the email me. After the second literally show you. The spreadsheet that we have which shows if we bought back ex amount of dollars how much of that would accrete to our book value.
And you'd be very surprised that the it's not unless you're going to do tens and tens and tens of millions of dollars.
It is not as accretive as you think it is.
But I can show you that Conversely.
We go back into the market every single quarter and buy stock with our on money out of our on pockets you seen that.
So we put our money where our mouth is buying back stock.
The what we would have to do is lay that out against the opportunity to to make hopefully 100% of your money and companies like potbelly in quantum and maven from here.
And that return profiles this guidance not very attractive.
Buying back our stock.
This is not so.
At the say other than maybe I'll be the only shareholder in five years, because all of them.
The management team will of bought back every share from every investor that doesn't want to on it and that's fine by me well take the private ourselves I don't I don't know.
I don't think ours or equity price should should trade at cash.
And have a 4 million dollar value ascribed to our private portfolio. When we do real marks on the Mark say the the we've got $35 million worth of assets. There you know maybe the exercise of sell the whole private portfolio. If we can do that we would be said that the thousand times.
You know, we will we should debate and I said in the our letter as any good management team should we should debate share repurchase wishes to debate dividends, we should stupid debate M&A, we should debate all of it and we will and we have and.
And we will continue to do so I'm not here for.
Any other reason than trying to win for you and all of us as shareholders and that's the truth.
And I.
I certainly don't think our share price reflects any of the turnaround.
That this company has seen over the last three years I think it's actually ridiculous and so in a day and a half when the market opens up for our management team again, we'll go pile back into the market and buy stock at the dollar 90, because it's down seven cents, even though our book value is $2. The 90 cents. So.
I'll show you. The chart. If you want just email me afterwards honestly share buying back stock makes no sense.
Yeah in fact, the other thing I would add to kevins comment as you know it. It's also not a simple the guide.
Allison that once the stock is bought back.
It's gone right. The money is gone and so it's not just do you think that you know.
Is it better investment today, but if we can recycle man that type of anything that is in south evidenced but it's an important factor in the analysis, which is the recycle our capital we have.
Substantial amount of loss carry forwards that allow us to shelter that capital the gains from tax.
For the foreseeable future and so it really comes down to if we if we it's not only just today, but it is also going forward in the future as we look to recycle that capital is that of better investment than our stock where once its repurchase literally that cash has gone and net given the restrictions on issuance of.
Shares for closed end funds that makes it difficult to get back.
Yeah Okay.
To me the about applauding, it's like anything else you should pay a higher multiple each pay on less discount for managers the do a good job for shareholders and.
The company should have a wider discount for managers that do a terrible job of from a performance perspective, I don't think our performance and our new strategy over the last few years has been warrants having evaluations its less than almost any other closed end fund that we.
Look at just don't.
I get the private portfolio is their investors have a difficult time, putting a value on it I totally get it I do not.
On a thousand times also but.
I don't know we.
We show 100% returns over three years is pretty good that should we think the market should pay us close to 90 or 95% worse case of for the whole business was was with cash and liquid securities just on our ability to generate returns for people, but that's not only for me to determine that's for the market. The determined in the market is determined on worth.
Worth of dollar 92 today whatever.
As with it as well as the board, we've got us all for that overtime.
Yeah and.
I totally totally understand the line that my last question is just on you guys are very small team.
Do you have you communicate anything about success contingency planning on this this roughly pandemic world that we're in.
What happens God forbid that theres illness.
Do you guys have.
Plans to is is there a broader team that can.
On an advisory board or anything that you follow up back on or do you have folks that are identified or or contingency plan, if something were to happen.
Yes, I mean, nobody would care [laughter] joking no as the board. It's we are of course sports always have to look at succession planning.
For the worst case scenarios, you will see on our board.
Our last two board members have discrete wall Street experience the.
This the this has been discussed at the board level.
Look if something happens to me the board is going to have to solve for that.
And the will have a plan for solving for that data on I don't know what else to ask we don't have someone in waiting.
For me or for Daniel who you know.
The other has the job on is whether the quit his his or her job income here or standing on the sidelines waiting for one of us to leave the I mean that doesn't work right in any organization. So the only thing that we can do is I want this business to be around the lot longer than we're going to be here. Our board knows that at our board has a mechanism for for the.
How to figure that out Daniel I don't know what else you one of them I think just as we do have a robust business continuity plan.
We've been all working remotely no issues there it really is just on <unk>.
Like any other company that's out there we do have the plans in place that if anything the work do you happen.
Yes, especially since the our small team we do have the policies procedures and everything else ready to kick in.
Right away and the company wouldn't Miss the the so I'd say, we are a big company needs. The as we learn from the.
Founder of the the from back in the day, Charlie Harris. He always established at it you know the company is the entity and we are employees of the entity and the company continues on and the same loss. The as you heard from Kevin is here Yeah look the cash is going to be here for the next person.
On me or if it's not Daniel and the board is going to have to bring in a competent portfolio manager who knows how to run money.
No. There is a lot of those I left Blackrock once and I knew that when I left the replacement with somebody else because life goes on and we're all replaceable, so and I don't think it's any different here.
Okay.
Thanks, so much for taking the questions guys best of luck from take care of stay safe.
Likewise by the way I'm not going on.
Yes, I missed out on something I'm just for the record on.
Going anywhere unless somebody were moving.
Likewise here since the same here.
Hi, the queue is empty I think we're we've answered all the questions. Okay, everyone. Thank you so much for your time today, it's it's been the trying year for everybody.
The weird the year for sure.
And.
I'm looking forward to having this year end and getting to a place where.
We all start moving out of our homes and back back to work.
And the to some level of normalcy I pray that the is 2021 I'm hopeful that it is I think the vaccines that were announced or.
The other defect of this is terrific and getting that out for manufacturer is going to be the logistics.
And the logistics around that is going to be the main issue between now and the next few months and hopefully we'll get there and.
I'm just looking for to this year ending in the meantime, we've got a good solid month and change to try and generate returns for you on and we'll try and do that you. All know the where we are you can text you can email you can call us we'd be happy to talk to you about anything that you want to talk about any given point in time. Thank you for the time and good luck investing thanks.
Thank you on making that disconnect.
Good day.